Frequently Asked QuestionsQ: What is the difference between getting pre-qualified and pre-approved? Ans: Generally, a pre-approval is a more thorough and official form of pre-qualification. When a lender pre-qualifies you, he/she calculates your maximum house payment based on monthly income and debt payments that you state. Generally, they have not run your credit report or looked at all of the detailed factors that go into the final decision of whether or not you qualify. When you get pre-approved, the loan officer takes a full application, collects the required income and asset documentation, runs your credit report, notes all extenuating circumstances and submits it all to the underwriter, who makes the official decision. When they issue the pre-approval, you know for sure how much you can afford to spend.
Q: Why should I get pre-qualified or pre-approved? Ans: There are two main reasons. First, you don't waste time -- yours or anyone else's -- looking at properties you are not qualified to buy. If you only qualify to buy a $100,000 home, there is no sense in shopping for a $150,000 home. A lender can let you know up front what you can afford to spend. Second, it gives you a lot of buying power when you make an offer on a home. If there is another offer on the property when you make your offer, but you have been pre-approved and the other buyer has not even talked to a lender yet, the seller may be more likely to accept your offer, even if it is for less money.
Obtaining a Loan In order to close the deal, you need to secure the necessary financing for the home. Set up some time to get your personal papers in order:
And as with most lenders, Elite Financial Services require that the home you want to purchase pass an appraisal inspection and your loan amount will be based on the lesser of the appraised value or sales price.
Q: What is a FICO Score? Ans: FICO scores are numeric representations of your credit profile. The higher the FICO score the better credit risk you are. FICO is a product of Fair, Isaac Company. These have been around for several years but started to be used in the mortgage lending business in 1995 for the purpose of keeping down the expense associated with Home Equity loans. You needed a certain minimum score to get such a loan. Now both FMLMC and FNMA insist on a FICO score on your credit report. Presumably, you can be denied a mortgage loan if your score is too low. At the present time we can say the following about these scores: They are based on years of computer modeling aimed at predicting who might be a credit risk. Their purpose is to reduce the cost of examining a credit report and speed mortgage approvals. When your FICO is computed the program tells the credit bureau what the 4 most important factors were in determining the score. Fair, Isaac and the credit bureaus do not want to reveal how these scores are computed. The Federal Trade Commission has ruled this to be OK. The important negative factors are: bankruptcies, delinquencies, credit lates, collections, too many "tapped out" credit lines, "too much" credit, too little credit history. The score is only as good as the data. The amount of credit data history is so large that there are problems with it. The most common problem is with relatives with the same name. Borrowers often dispute the data but it is very accurate. It is more important to keep a good or perfect credit history. Running a credit inquiry is said to lower the FICO score (very slightly) so it is important to not authorize someone to pull your credit report unless necessary. Down-payment You can get a home with as little as 5% down-payment (there are special cases which do 3% down or even 100%). If your down-payment is less than 20% of the purchase price, or 20% of the appraisal for a refinance you may need Private Insurance (PMI). The down-payment must be well-documented. That is, you must show, for example, bank statements proving that you have had the money for at least 2 months. If the source of the down-payment is a gift from a relative you will need:
The purpose of all this is to make sure that the down-payment is not a loan and most especially not coming from the seller.
Q: Do I need Private Mortgage Insurance? Ans:Private Mortgage Insurance (PMI) is needed on all loans where the loan-to-value (the loan amount divided by the value of the property) exceeds 80%. (There are some examples of "self-insured" loans where the rate is increased and there is no formal PMI but you pay one way or another.) The mortgage insurance premium depends on the loan-to-value ratio. It is 3-tiered: 80.01%-85.00%, 85.01% to 90.00% and 90.01% to 95.00% each step costing more. The mortgage insurance also depends on the loan amount and the type of loan. Adjustable rate loans have higher premiums than fixed rate loans. At the present time you can choose between monthly and annual premiums. The PMI is given by a different party than the lender. Your lender will send a copy of your loan application package to the MI Company for their approval. Among the loan documents you will sign at closing is a PMI agreement. Your lender will "impound" the PMI payment along with your principle and interest. It is usual that when your loan-to-value equals or exceeds 90% your property tax is also impounded. PMI policies usually have "escape" clauses describing under what conditions you can stop paying PMI. It is necessary that you read the PMI policy to determine this. Make no assumptions.
Q: What is a Rate Lock? Ans: The rates you see on this web site are always quoted (unless otherwise noted) for 30 day rate locks. The interest rate on your loan is not set until we fax a "Rate Lock" form to the lender and receive confirmation that they have received it. The loan must fund before the "lock expiration" date or you can lose your rate lock. When we are locking your rate and discussing the lock expiration date it is important that both borrowers be available to sign the documents. You must tell us of your vacation and travel plans. If one borrower will be out of town we can have a "specific power of attorney" prepared so that the other person may sign for both. You can lock your rate before your loan is approved, you can even lock your rate before your loan is submitted. In general, we can get you a 45 day rate lock for an extra 0.125 in rate or 0.5 points in cost. It must be noted that the cost for extended locks can vary significantly with the volatility of the market. When rates are volatile long term locks are more expensive
Q: Why should I do a no point, no fee loan? Ans:Maybe you are thinking of refinancing but you think rates are going to decline some more this year. What should you do? Suppose you have an $250,000 adjustable mortgage with a lifetime cap of 10%; your monthly payment can go to $2,193. Your current adjustable rate is 7.5%, the monthly payment is $1,748 and may go to 8.5% during the next year, your payment will increase to $1,922. The No-Point No-Fee Advantage: If you can refinance your home @ 7.875% payment of $1,812 fixed for 7 years you can avoid the risk associated with an adjustable and if rates fall you can refinance once again. Why? By not paying the loan points and closing costs out of your pocket you have the financial flexibility to refinance once again if interest rates continue to go down. Your new rate of 7.875% cannot go any higher for 7 years but if rates fall to, say, 7.5% or 7% you can refinance again & again and continue to lower your monthly payments without spending anything. The No-Point, No-Fee loan program is a quirk which solely favors the borrower in a declining rate market. This is an opportunity to actually "get something for nothing".
Q: What costs can I deduct from my income at tax time? Ans:Everybody's tax situation is different, so be sure to check with your tax advisor. However, in most cases, mortgage interest, property taxes, and points are all tax-deductible. Mortgage interest is deductible in the year paid. Many people make their January payment at the end of December so they can include that interest in their deduction. Property taxes are also deductible in the year paid. Many people pay their 2nd half tax bill in December even though it might not be due until the middle of the following year so they can include that amount in their deduction. Points are a little bit different. The way the deduction is calculated depends on whether they were for a purchase or a refinance. On a purchase, the cost of points is tax-deductible in the year they were paid. On a refinance, the deduction is spread out over the life of the loan. For example, if you took out a 30-year loan, you would be able to deduct 1/30th of the cost of the points in each of the next 30 years. If you took out a 15-year loan, you would be able to deduct 1/15th of the cost of the points in each of the next 15 years. In any event, if you pay off the loan early, the balance is deductible in that year.
Q: I have enough money to put 50% down on my new house. Why would I want to only put 20% down? Ans:You would only want to do this if you believe you can invest the additional 30% and earn a return greater than the interest rate on your mortgage. With interest rates at a historical low, borrowing money is cheap right now; but savings rates are even lower and the stock market is very volatile. A wise investor can make this work to his/her advantage, but just be careful!
Q: How can it make sense to pay more in a house payment than I am currently paying in rent, month after month? Ans:Rent is almost never tax deductible, but mortgage interest and property taxes usually are. Also, part of your loan payment goes towards paying down the loan balance each month, which increases your equity. You can look at it like putting that money into a savings account that you can withdraw when you sell the house. Compare paying $825 per month in rent to buying a home with a $1,200 monthly payment ($150 principal + $850 interest + $175 property taxes + $25 insurance). Right away, you can subtract the $150 principal payment from the $1,200, because it is like putting that money in savings. Now, let’s look at the tax benefits of home ownership. Assume you are in the 28% Federal income tax bracket. Deducting the $850 interest payment and the $175 in property taxes from your income means you will pay $287 less in income taxes each month ($850 * 28% + $175 * 28%). Your $1,200 house payment would really only cost you the equivalent of $763 per month ($1,200 total - $150 principal - $287 tax benefit)-that's $62 less than your rent payment!
Q: Why is the percentage on my Truth-In-Lending Disclosure Statement different than the rate I was quoted? Ans:The number on your Truth-In-Lending Disclosure Statement is the Annual Percentage Rate (APR). The APR is the average cost of funds over the life of the loan, including closing costs, PMI and prepaid interest. If you were to dice those costs into equal amounts for each year of your loan, determine that cost as a percentage of your loan amount, and then add it to your note rate, that would give you a rough estimate of your APR. To make a confusing matter even more confusing, if you have an Adjustable Rate Mortgage, it is assumed that your rate will follow the schedule based on the current Index, your Margin, and the Adjustment Caps, and then stay at the Fully Indexed Rate for the remaining life of the loan. For example, if your Note Rate (the initial Start Rate) is 5%, the Index that your loan is tied to is currently 5%, the Margin you add to the Index to come up with your Fully Indexed Rate is 2.75% and your 30-year loan adjusts every year a maximum of 2% per adjustment, then it is assumed that your rate would be 5% for the first year, 7% for the second year, and 7.75% for the remaining 28 years. Of course, the index will almost certainly go up and down over time, so your actual APR will almost certainly differ from the estimated APR on your disclosure. Also, the APR on the disclosure assumes that you are going to keep your loan for the entire term. If you pay it off early for any reason that will also affect the actual APR as well.
Q: Fixed Rate Mortgages Ans:The most common type of mortgage program is a fixed rate, as your monthly payments include interest and principal which never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable. Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There may also be 40 year and other programs available such as "biweekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.) Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages. During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.
Q: Benefits of Fixed Rate Mortgages Ans: If you want the stability of a set rate for the life of your loan, then a fixed rate mortgage may be the way to go. Usually the longer the term of the mortgage, the more interest you pay over the life of your loan. Though, a longer term means your monthly mortgage payments will be less than they would be with a comparable shorter-term mortgage.
Q: Benefits of an Adjustable Rate Mortgage (ARM) Ans:Adjustable Rate Mortgages start out with a lower interest rate, then the interest rate may adjust periodically. If you believe your income will increase steadily over the years, or if you plan to move in a few years and aren't concerned with about potential rate increases, you may want to consider an ARM. Interest rates may move up or down as market conditions change. Interest rate changes typically are subject to two caps, one for each adjustment period and one for the life of the loan.
Q: How to Decide if an ARM Is Right for You Ans: An adjustable rate mortgage, called an ARM for short, is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes.
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